This article is a longer-version of one originally published in the New Statesman, written by Jan Skoyles. Views expressed are not those of Coinsilium and do not constitute investment advice.
Should you invest in bitcoin? Like all investment opportunities there are conflicting answers, but with bitcoin the difference of opinion is split in an interesting way.
If you look at the behaviour and opinions of the traditional investment industry ie banks, investment managers and independent financial advisers then the answer is a resounding ‘no’. Many cite fraud, money laundering and high volatility as the main risks.
If you ask tech entrepreneurs, dotcom billionaires and those embracing the sharing economy then the answer is a very loud ‘yes’. They cite decentralization, the limited supply and its potential as the opportunity.
But more confusingly if you look for guidance from the government and regulators, here in the UK, then things are a little more open minded. The Bank of England believe the currency shows ‘considerable promise’ and George Osborne is committed to making the UK the global bitcoin hub. However regulation is coming and there are warnings of fraud and damage to the economy.
Personally, I don’t know if you should invest in bitcoin or not, all I do know is that we are on the cusp of a major financial technology revolution and this baby of a currency is going to play a significant role.
It was in 2011 that I first became aware of bitcoin, a decentralised cryptocurrency that seemingly came from nowhere to go on to grab the attention of governments, banks and billion-dollar companies.
It was a 17 year old coder who introduced me to ‘the bitcoin', back in 2011. I was sceptical to say the least. At the time I was on the research desk of gold investment platform The Real Asset Company. I believed (and still do) that gold is money. So, imagine my reaction when I was told that something ‘as good as gold’ had been created seemingly from thin-air and was going to usurp the monetary system as we know it.
Fast forward four years and I have watched in awe of how bitcoin has shocked its way into the public consciousness.
From an association with money-laundering and drug dealers we are now presented with a far more open minded view from the media, regulators and government. According to the government’s Office for Science, "Digital currencies such as bitcoin have the potential to replace traditional currency and, by extension, the need for central banking and regulatory systems.”
In turn I have also become far more open-minded and turned a full 180 degrees, acting as a cheerleader for both the currency and the supporting technology. What changed my mind? People. As people supported the currency we saw amazing developments in the infrastructure that would let it thrive. It’s growth has been like the internet, its success relies on its users, of which there are a growing number.
What is the opportunity cost of investing in bitcoin?
We make investments because we expect to see returns over the coming months and years on whatever asset or financial product we have put our money into.
With interest rates near zero in the UK and below zero in Switzerland, Denmark, and Sweden, the attraction of holding money in bank is increasingly disappearing.
When interest rates go in this direction the opportunity cost of holding assets such as gold, and bitcoin decrease.
We also invest for insurance and security; this is why many people choose to invest in gold. With bitcoin, proponents argue that you will see both. The reason interest rates are so low, or negative in some cases, is thanks to monetary policy and the ongoing manipulation of our he money supply through quantitative easing and fractional reserve banking
Will the price of bitcoin increase once again? Yes, probably within 24 hours of you reading this article. But then it will fall again. It is exceptionally volatile. However, it is still a baby, finding its place in the world as we create the right tools to support its development.
How can I invest in bitcoin?
At the moment the most common approach to investing in bitcoin is to just buy some. You can do this easily without going through a broker, an IFA or otherwise. There are some well-established and well-managed bitcoin exchanges out there who make it easy for you to start trading. First you need a wallet, blockchain.info is one of the more popular providers however the likes of Hive offer a more user-friendly experience.
There are also some ETF and hedge fund offerings coming onto the market. In these cases check their regulatory stays and security measures. Cold-storage, effectively an offline vault for bitcoin, must be used by these organisations and make sure holdings are insured. Elliptic is a popular cold-storage provider as is Armoury.
What can I do with my bitcoin?
An increasing amount, but admittedly this still does not amount to much. Here in the UK there is still so much apprehension within banks about holding bitcoin-touched funds that there are a limited number of businesses who are prepared to accept them.
You can do far more online. Companies such as BitPay and CoinSimple make it very straightforward for online businesses to accept bitcoin-funds. Large companies such as Dell and Microsoft made headlines when they announced they were accepting the currency. Here in the UK it isn’t just about the tech, you can also buy theatre tickets with Theatre Tickets Direct.
If you want to join the masses, then at the moment the majority of activity seen in the bitcoin space is speculative trading. Look for sites who have good reviews and operate like any financial institution in terms of security. London-based btc.sx is a big favourite amongst bitcoin traders, they take operations seriously, offering cold storage, multi-sig wallets and full reserves.
Is it safe?
Can you lose all your money? Yes. But find me an investment where that can’t happen. As with all investments you should not invest what you can’t afford to lose.
It’s also easy to forget that you should never invest in something you don’t understand. By understanding what makes bitcoin unique and the different ways you can invest in it you are inherently protecting yourself.
Bitcoin is not regulated. There, we got that one out of the way. Does that mean it is highly dangerous and should be avoided at all costs? Not if that same logic applies to your investments in property, gold and cash. Those assets also aren’t regulated, however the services offering you such investments very often are.
At the moment the bitcoin ecosystem is a pretty much a blank book when it comes to regulation in the UK, and this is a good thing. The UK government, regulators and central bank have been very open-minded when it comes to dealing with bitcoin. Recently the government announced anti-money laundering rules to exchanges. I suspect we will see more regulation come into play, however those on the case seem to be making a concerted effort not to hinder innovation in this space.
Do you understand bitcoin?
As with any investment, you shouldn’t invest in bitcoin if you don’t understand it. Make sure, before investing that you know what all the fuss is about. What makes bitcoin, bitcoin? What is so unique and ground-breaking about it that it could be an interesting investment opportunity?
For those unfamiliar with bitcoin and its origins I highly recommend Dominic Frisby’s Bitcoin: the Future of Money? A great guide to the digital currency and its story, written so that even someone who panics over the television remote (I have my Grandma in mind) would be able to understand.
Jan Skoyles is the former CEO of The Real Asset Company, a gold-investment company that successfully launched a gold-backed cryptocurrency.